The Private Finance Initiative has been knocking around for so long in the UK that it is almost possible to regard it with affection. Since its controversial launch in 1992, the PFI appears to have passed through the inevitable stage of unattractive, pimply adolescence and grown up, helped by the Treasury taskforce and its successor, Partnerships UK. More than £10bn of infrastructure investment in the UK will come from private finance over the next three years.
Labour’s conversion to the joys of off-balance-sheet infrastructure financing, albeit ideologically suspect, was born of hard-nosed calculation. The government could not afford its ambitious plans to improve public services and stick to the Tories’ spending plans unless it used the PFI.
A similar situation has prompted governments in southern Europe to embrace private financing in the shape of public-private partnerships. Greece, for example, is emerging as a leading PPP market, with projects such as the road linking Athens and its new airport 50km to the west. Other projects include the financing of the Thessaloniki subway in northern Greece for £380m.
In Portugal, there are plans to use PPPs to develop 14 road concessions, which will no doubt result in even the quietest corner falling victim to the euro tourist and the juggernaut.
Although there have been few PPP projects in Austria, things are likely to change. Again, the key factor is a combination of large investment requirements in infrastructure, and public sector spending limits that are likely to be tightened by the incoming government. While pioneering PPP projects such as the Semmering Basistunnel have made little progress over the past few years, the prognosis for PPPs in Austria is good.
By contrast, the German and Dutch markets have resisted the lure of the PPP. Despite the existence of a number of high-profile projects, the concept has still not been fully accepted in Germany or The Netherlands. In The Netherlands particularly, there is lively debate about the use of private financing and the usurping of what are seen as traditionally public functions.
Legislation has been in place in Germany for a number of years to allow private finance in road building, although only two major projects have made real progress – tunnels in the north German cities of Rostock and Lübeck. Echoing the UK experience, delays have been generated by lengthy concession negotiations with councils, while, in the absence of standard documentation, lawyers have had to reinvent the wheel.
This should now be changing as standard concession arrangements are drawn up by the German government. Scope in this area is, however, limited by two main factors. First, the legislation is narrow and restrictive. Second, money is less likely to be raised through a toll system because German users already consider themselves well-served by the road network.
In other sectors in Germany, large PPPs have also been few in number and have tended to generate political controversy. The new Berlin airport, for example – as much a privatisation as a PPP – was seen by some as a flagship project but has now been stalled by a successful court challenge from the losing bidder. As a result, the bidding process is likely to be reopened and the date for a single international airport in Berlin is receding.
Dutch politicians and even bankers have questioned whether PPPs are any more than a gimmick, arguing that public money is cheaper
In the meantime an even more vexed project, the Transrapid railway scheme, has also hit the buffers. This railway, planned to run between Berlin and Hamburg, is intended to use revolutionary magnetic-track technology to achieve speeds as high as 450 km per hour.
But the technology is still in its infancy and, under pressure from the Green Party, the German government has capped development costs at a figure that means there is insufficient money to go ahead as planned. The private consortium building the trains could yet become involved in funding the system, but the consortium members, including Siemens, Thyssen-Krupp and Adtranz, are heavily stretched on other projects.
Private finance is increasingly being welcomed into a range of public sector schemes. Local authorities of every size – even most recently the German defence ministry – are looking at outsourcing and facilities management, in the latter case provoking a heated media debate. Although German moves may not always match the UK definition of PPPs, real change is in the air.
To date, however, few large-scale genuine PPP deals have been completed in Germany, and of those the most prominent was, at least partly, a UK deal for the new British embassy in Berlin. This involved the embassy paying a fixed rent over a number of years for use of the Michael Wilford-designed embassy building.
In The Netherlands, the picture is slightly different. Here, the flagship deal is the High Speed Line, a rail link planned to connect Amsterdam with the Belgian border. Tendering is taking place for the infrastructure, with train service operating contracts to be awarded later.
Elsewhere in The Netherlands, there are other PPP straws in the wind: a light-rail PPP project connecting Rotterdam, Amsterdam, The Hague and Utrecht; a proposal for a freight line connecting Rotterdam and Germany; and the possibility of PPP involvement in a major water treatment and sewage plant in The Hague.
These projects are at an early stage and some Dutch politicians and even bankers have questioned whether using PPPs for such projects is any more than a gimmick, arguing that public money is potentially cheaper. Certainly the European Investment Bank, which has set itself a target of more active support for PPPs with job-creating initiatives, has made little headway in The Netherlands or Germany.
In short, progress has been fitful, with cultural and political issues well to the fore. However, many commentators see this as a short-term phenomenon and are confident that the rising tide of PPPs and the financial logic that underpins them will win round even the sceptical in mature European markets.
Henry Sherman is a partner in CMS Cameron McKenna. This article includes contributions from other partners in the CMS group.